What is Senior Debt?

Senior debt refers to a class of debt that has priority over other types of debt in the event of a borrower’s default or bankruptcy. It is considered less risky than other forms of debt, such as subordinated or junior debt, because senior debt holders are the first in line to be repaid from the available assets of the borrower. In other words, if a borrower becomes insolvent and its assets are liquidated, senior debt holders will be paid before any other creditors.

Senior debt typically has lower interest rates compared to other types of debt, reflecting its lower risk profile. This type of debt is often secured by collateral, which means it is backed by specific assets of the borrower, such as property or equipment. If the borrower defaults on the loan, the lender has the right to seize the collateral to recover the outstanding debt.

Examples of senior debt instruments include:

  1. Secured bank loans: Bank loans that are secured by collateral, such as real estate or equipment, are typically considered senior debt.
  2. Corporate bonds: Some corporate bonds are classified as senior debt, meaning they have a higher priority for repayment than other unsecured or subordinated debt issued by the same company.
  3. Mortgage loans: Mortgage loans are typically senior debt, as they are secured by the property being purchased, which serves as collateral for the loan.

In a capital structure, senior debt is followed by other layers of debt and equity, such as mezzanine financing, subordinated debt, preferred stock, and common stock. Each layer represents a different level of risk and return, with senior debt being the least risky and common stock being the riskiest.

OTHER TERMS BEGINNING WITH "S"

  • Schedule of Accounts

    An accounting schedule is a document that provides details or proof for the information stated in a primary document. In business, accounting schedules are needed to provide proof for the ending balances stated in the general ledger.

  • Seasonality

    Characteristic over time in which the data experiences predictable changes that recur every calendar year. Seasonality explains the fluctuation in demand for products used during different seasons.

  • Secured Overnight Financing Rate (SOFR )

    SOFR stands for Secured Overnight Financing Rate, which is a benchmark interest rate that is used to price a variety of financial products, including loans, bonds, and derivatives.

  • Small & Medium Enterprise (SME) Financing

    Small & Medium Enterprise (SME) Finance is the funding of small and medium-sized businesses and represents a major function of the general business finance market. ECapital has specific programs for MBE’s (Minority Business Enterprises), DBE's (Disadvantaged Business Enterprises) & SME’s…

  • Small Business Financing

    Whether you are a start-up or existing company, there exists a type of small business financing to fund your dreams and growth. SBA loans, Invoice Factoring, Purchase Order Financing, Equipment leases, floor plan, and vendor financing are just a few…

  • Small Business Loan

    A Small Business Loan is an all-encompassing term used to describe the many ways you can get funds to start or buy a business. Banks, factors, leasing companies, the seller of the company and FFF (Friends, Family & Fools) are…

  • Special Assets Department

    Special Assets Department or Bank Workout Group is the department within a lender that handles business loans and other types of funding that are in trouble. When a business has experienced multiple quarters of loses, perhaps missed loan payments or…

  • Statement of Work

    A Statement of Work (SOW) is a document, routinely employed in the field of project management, which defines project-specific activities, deliverables, and their respective timelines, all of which form a contractual obligation upon the vendor, in providing services to the…

  • Stretch Financing (Stretch Loan)

    A stretch financing or sometimes called a stretch loan is a form of financing for a business that can be used to cover a temporary gap. The loan "stretches" over that gap, so the business can meet financial obligations until…

  • Subordinated Term Loan

    A subordinated term loan or subordinated loan is debt that’s paid off after all principal loans are paid off, if there’s any capital left. It’s also known as subordinated debt, junior debt, or a junior security.

  • Subordination Agreement

    A Subordination Agreement is when a creditor is placed in a lower priority for the collection of its debt from its debtor's assets than the priority the creditor previously had. In common parlance, the debt is said to be subordinated…

  • Suppressed Availability

    Suppressed availability is a term used in finance to describe a situation where the availability of credit or financing is restricted or limited due to external factors. These factors can include economic conditions, changes in government regulations or policies, or…